‘Tech constraints’ may slow China’s 5G rollout, says Jefferies

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Construction of China’s next-generation 5G mobile network could be pushed back due to technical constraints and signs of a more “rational view” by the government, according to analysts at US investment bank Jefferies.

Analysts cut forecasts for China’s overall 5G capital expenditures (capex) by 8% or RMB 57 billion ($8.49) in 2020 to 2022 and pushed expectations for peak capex out to 2023 from 2021 to 2022 in a recent report that re-evaluates 5G timing and rollout following a critical development in December. The government allocated radio frequency spectrum to China’s three telecommunications companies, enabling final trials before wide commercial implementation in 2020, spurring a round of financial re-assessments. Other factors influencing the forecasts changes include recent 2G re-farming indicators and signs of moderating mobile data price pressure from the government.

While the Ministry of Industry and Information Technology (MIIT) placed “accelerating 5G” as a top priority, the rollout will likely not happen as quickly as expected due to “…the likely lack of a range of affordable 5G handsets and attractive applications (both consumer and industrial),” said equity analyst Edison Lee in the report.

The new report also updates recommendations on major 5G-related stocks including China Mobile, ZTE Corp., China Unicom, China Tower and Yangtze Optical FC (YOFC).

Analysts upgraded China Mobile’s stock to buy from hold and raised the price target for its shares on higher revenue forecasts and lower capex due to its spectrum decision to build at 2.6GHz, rather than the previously assumed 3.5GHz or 4.9GHz.

“China Mobile’s 5G spectrum allocation will likely reduce the number of new tower sites it needs, as its 5G and 4G network density will be similar,” Lee said.

China Mobile’s potential 2G re-farming will likely start in the second half of 2019. The telecommunications carrier has one of the largest existing infrastructures to benefit from such spectrum re-farming. China Mobile’s spectrum allocation for 5G could kickstart its own 2G re-farming process as well as China Unicom’s, which although began in 2017 but has yet to roll out on a large scale, analysts noted.

Furthermore, analysts expect mobile data pricing pressure from the government, as part of its “raise speed and drop price” initiative, to start moderating this year to a 20% price drop in data fees from more than 30% in 2018.

Shares of ZTE Corp., on the other hand, have been downgraded from buy to hold. “We believe ZTE’s carrier business will become an even more important driver going forward, as its handset business has likely shrunk dramatically after the US export ban event.” ZTE’s handset revenue is expected to fall significantly from 20% of total in 2017 to 6% in future, mainly due to the loss of the Europe and US market, according to the report.